It's Not You, It's Us: Assessing the Contribution of Trademark Goodwill to Properly Balance the Results of Trademark License Rejection

• Publication year: 2019

It's Not You, It's Us: Assessing the Contribution of Trademark Goodwill to Properly Balance the Results of Trademark License Rejection

Clayton A. Smith

IT'S NOT YOU, IT'S US: ASSESSING THE CONTRIBUTION OF TRADEMARK GOODWILL TO PROPERLY BALANCE THE RESULTS OF TRADEMARK LICENSE REJECTION

ABSTRACT

In 1988, Congress amended § 365 of the Bankruptcy Code dealing with the rejection of executory contracts to allow intellectual property licensees to retain usage rights following rejection. This addition, however, did not include trademarks in its definition of intellectual properties. For this reason, the Circuit Courts are currently split as to the proper treatment of the rejection of trademark licenses in bankruptcy. The split has intensified in recent years, with Mission Product Holdings, Inc. v. Tempnology, LLC, decided in the First Circuit in January of 2018, directly criticizing the Seventh Circuit's 2014 decision in Sunbeam Products, Inc. v. Chicago American Manufacturing. Both sides of the split, however, fail to take full account of the unique aspects of trademark law necessary in order to achieve the most equitable solution for all parties.

This Comment argues that, in absence of guidance from Congress and to create the most equitable solution, courts should place paramount concern in protecting the value of licensed trademarks. In doing so, courts should consider the aspects of trademarks that make them distinct from the other intellectual properties: their reflection of the expectations and goodwill of the public. With this relationship in mind, I propose a three-factor test to help courts assess whether favoring a licensor or licensee of a trademark would create the most equitable result for both the estate and the public at large.

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INTRODUCTION

Imagine if tomorrow morning, McDonald's filed for bankruptcy.¹ What would happen to its thousands of franchisees? These men and women built their businesses around those Big Macs®,² Chicken McNuggets®,³ and McFlurries®.⁴ Would they be left without the branding they depend upon as McDonald's reorganized, hoping to reacquire and rehabilitate its own brand? After all, one of McDonald's biggest assets is the power of that brand. Could restructuring even be possible with its franchisees' continued usage of its trademarks, diluting the brand that it needs to come out of Chapter 11 alive? Where would the courts come down in this struggle over the usage of licensed trademarks?

While McDonald's is unlikely to send its golden arches to the bankruptcy court any time soon, smaller scale versions of trademark licensing rejection do happen, and the Bankruptcy Code⁵ as currently written by Congress is inapt to deal with them.⁶ Without congressional guidance, courts have taken it upon themselves to find the most equitable solution.⁷ In so doing, various Circuit Courts have split,⁸ leaving the prospect of how exactly any given license will be dealt with by bankruptcy courts in flux.⁹ This leaves no guarantee from jurisdiction to jurisdiction how a license will fare post-rejection, let alone whether the treatment will be the most equitable result for all parties.

In 1988, Congress amended the portion of the Bankruptcy Code dealing with the rejection of executory contracts to allow intellectual property licensees to retain usage rights following rejection.¹⁰ This addition, however, did not include

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trademarks in its definition of intellectual properties.¹¹ This was for good reason. Trademarks hold a unique place among the various forms of intellectual property. Unlike patents or copyrights, which spring from the minds of their creators to a place of value in the world, trademarks live within the relationship between a business and its customers.¹² This relationship is muddled when, as in the case of franchising, the owner of the trademark and the purveyor of a business are not the same legal entity. The relationship is complicated further when the licensor of a trademark goes into bankruptcy and attempts to reject the trademark license under the Bankruptcy Code.

Both sides of a trademark license face difficulties in the course of bankruptcy. Licensors attempt to use bankruptcy to regain complete control over the rights to their trademarks in order to rebuild their assets to pay off their debts and move forward once again. Licensees attempt to hold on to rights to use the licensor's mark that they often have built their current businesses around. And Congress, first through omission and then through inaction, has failed to provide the legislative guidance to help judges sort through these complications.

Without definitive congressional word, courts have split on the proper tack as to the rejection of trademark licensing agreements.¹³ One side takes the firm line that trademark licenses receive no special treatment beyond that of any other executory contract.¹⁴ The other treats trademark licenses more in line with those of other intellectual properties.¹⁵ This places uncertainty on trademark licenses throughout the nation, uncertainty that limits the value of licenses for companies in and out of the bankruptcy system.¹⁶ All the while, the question remains as to which approach, if either, is most equitable.¹⁷

This Comment argues that, in absence of guidance from Congress and in order to create the most equitable solution, courts should place paramount concern in protecting the value of licensed trademarks. In doing so, courts should consider the aspect of trademarks that makes them distinct from the other intellectual properties: their reflection of the expectations and goodwill of the public. With this relationship in mind, courts should ensure that the entity which

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has most contributed to the value of the relationship between consumers and brand may continue to use the marks in question. By doing so, courts will not only do justice in the dispute between licensor and licensee but also protect consumers as trademark law is designed to do.

Section I of this Comment discusses the key elements of bankruptcy, executory contract law, and trademark law necessary to a full understanding of the issue. Section II analyzes the circuit split that currently exists over the proper interpretation of the treatment of trademarks under § 365 of the Bankruptcy Code.¹⁸ Section III assesses the issues raised by both sides of the split, before introducing a factor test designed to aid courts in analyzing individual cases in a way which is neither overly rigid nor cavalierly vague toward trademark rights.

I. BACKGROUND LEGAL CONCEPTS

Three areas of law govern the treatment of the rejection of trademark licensing agreements: the Bankruptcy Code, executory contract law, and trademark law. Each offers insight as to how individual trademark license cases should be handled. First, the purposes behind the Bankruptcy Code offers an overarching guide for what kinds of results courts should seek to create.¹⁹ Next, executory contract law defines the kind of relationship trademark licensors and licensees have, within which the goals of bankruptcy can be fostered.²⁰ Finally, trademark law is essential to understand the unique form of property at the center of these disputes in order to come to the most equitable result for both the parties and society as a whole.

A. The Goals of Bankruptcy

Congress established the Bankruptcy Code to further two primary goals: to provide the debtor with a fresh start and to maximize the repayment of creditors.²¹ For businesses, this is ideally served by reorganization.²² The Supreme Court has emphasized the value of reorganization to the debtor's fresh start, noting that the "fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible

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misuse of economic resources."²³ Meanwhile the Bankruptcy Code mandates that any such reorganization also pay creditors at least as much as liquidation, ensuring that both goals are met.²⁴ Thus, the Bankruptcy Code creates a system in which the debtor, creditors, and society at large have an interest in restructuring the legal and financial realities of the estate to maximize value.

B. The Role of § 365 in the Bankruptcy Code

In order to best maximize the value of the estate, the debtor in possession may be forced to breach contracts that, at the time of bankruptcy, are economically inefficient.²⁵ Section 365 of the Bankruptcy Code allows the debtor in possession of an estate in bankruptcy to reject or assume executory contracts, with the goal of allowing the assumption of the most valuable contracts as assets and the removal of the most burdensome.²⁶ The traditional standard used by the Supreme Court to determine whether a debtor in possession has acted properly in rejecting an executory contract is the "business judgment" rule which holds that a "debtor's business judgment should not be interfered with, absent a showing of bad faith or abuse of business discretion."²⁷

Section 365 deals with executory contracts within bankruptcy; however, the statute itself does not define the term "executory contract."²⁸ The standard definition of an executory contract follows the Countryman test,²⁹ which states that executory contracts are "contracts on which performance remains due to some extent on both sides" provided that non-performance of the duties of either

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party would result in a material breach of the contract.³⁰ For instance, a typical residential real estate lease agreement is executory, as the landlord has an obligation to allow residence and maintain a certain standard of repair, the renter has an obligation to pay rent, and failure of either party to perform results in a breach of the contract. Courts have applied the test in such a way as to hold that if one party has substantially performed its obligations, the contract is no longer executory.³¹

When a contract is rejected, § 365(g) provides that "rejection of an executory...